With an ever-growing population requiring more resources than ever, sustainability issues are no longer a conversation pushed to the back of the agenda, and authorities are now taking action. So what does the changing landscape of green leases look like?
The changing regulations impact our day-to-day legal practice and shape the way we approach transactions.
What regulations need to be considered and how are they changing?
Most of us are familiar with the changes to the Minimum Energy Efficiency Standards (MEES) requirements and Energy Performance Certificates (EPC) rules which took effect from 1st April 2023, making it a legal requirement to have an EPC of at least rating “E” to continue with a commercial letting (subject to certain exemptions).
Further changes to the MEES regulations are anticipated following a consultation issued in 2021, foreseeing the minimum energy efficiency standards for let buildings increasing to “C” by 2027, and to “B” by 2030.
Our job at Moore Barlow is to alert our clients and future proof their leases against the changing regulations. We want to be there discussing these issues at the outset when heads of terms are being agreed, preventing potential delays down the line.
We cannot guarantee when the regulations will change, but it makes sense to be ahead of the curve. We are already seeing some institutional lenders’ adopting a more cautious approach to lending on properties with an EPC rating lower than C. Landlords will need to ensure that their buildings meet the higher standards, and therefore need to be thinking now about who will bear the cost of improvements, who will make the improvements, and whether the landlord has sufficient rights to access the property and undertake works.
When do green leases come into play
Green leases include provisions setting out the respective responsibilities of landlords and tenants to improve the sustainability and environmental performance of a property.
Green lease provisions can be legally binding on the parties, in which case we refer to them as “dark green”, or they can simply express a commitment to sustainability and include “targets” that the parties agree to work towards, but do not necessarily commit themselves to (“light green” leases).
However, it is not simply the case that additional environmental clauses are added to an otherwise generic lease. When green lease provisions are implemented, there can be a wider impact on the other lease terms.
How Moore Barlow can help
Moore Barlow can help you consider these issues, your longer-term obligations, and together with your agent, help to strike a balance between the parties about how these issues are tackled going forwards. We would be more than happy to help you consider:
- The impact on rent for a landlord, and utility bills for a tenant – There is a trade-off here. A more sustainable and energy efficient building with lower utility bills is a more attractive prospect for a tenant but can mean a higher rental value for the landlord.
- Responsibility for improvements – The landlord is legally responsible for providing the EPC, but should they bear the burden of the cost of improvements required to bring a property up to standard, especially if the tenant is going to be in occupation for the longer term? Could the tenant contribute towards costs to the extent that they will benefit from cost savings?
- Service charge – Can the landlord recover the cost of improvements from the tenant via the service charge? Conversely, is the tenant adequately protected from being charged for major capital expenditure?
- Rent Review – An improved building can improve the outcome of a rent review for the landlord, but could the lease say that the tenants’ environmental improvements are to be disregarded upon rent review, preventing their good actions resulting in an increased rent?
- Rights of access to the property – As the legal requirement to provide an EPC ultimately sits with the landlord, they must make sure that they have adequate rights to inspect the property, to obtain an EPC, and to make any necessary improvements.
- What environmental sustainability measures each party will take – From the tenant agreeing to turn lights off at the end of the day, to them agreeing to only fit out the property using fully sustainable materials.
